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An Escrow provider is a neutral third party who accepts monies from the buyer and a “grant deed” from the seller. Then, in accordance with the “purchase contract” or the AGREEMENT between the buyer and seller, transfers title to the buyer and disburses monies to the seller of the home.
After haggling over price and terms, the buyer and seller will settle on a final price and set terms of offer. The purchase contract is a bi-lateral promise. In laymen’s terms it is “promise for a promise” document.
For example a buyer agrees to purchase the home at 123 Main Street within 30 days at agreed upon price.
The seller agrees to provide proof of a clean chain of title, make repairs and fumigate the property.
Since these promises are completed in a “step by step” mutually acceptable fashion, it is practical for a neutral third party to hold the buyers deposit as well as the sellers grant deed.
The escrow officer types up a formalized set of pages (escrow instructions) to present to both parties for final review. Upon both parties signing, “escrow” is opened with the escrow officer depositing the buyers check into their escrow account and receives the signed grant deed from the seller.
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Does the law require a seller or buyer use an Escrow Corp.?
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NO. But…All “principals” in the transaction (buyer, seller) and the lender want a guarantee that no funds or property ownership will transfer to the other until the conditions of the contracts in the transaction have been completed.
The escrow holder has the fiduciary (legal) duty to sequester (buyers) monies and (seller) documents (i.e. “grant deed”) while they are in the possession of the “escrow officer.”
Once all of the provisions in the purchase contract have been fulfilled, the escrow officer will authorize the title company to wire money into the escrow “trust fund” account and to disburse funds. The escrow offer simultaneously orders the title insurance company to convey “clear title” to the buyer.
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What other Duties does escrow perform?
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Disbursement of funds (property taxes and homeowner insurance) and provides an accounting of all expenses (the Closing or Settlement Statement) to both buyer and seller.
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Who Chooses the Escrow?
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By law it’s negotiable. But the seller’s agent traditionally chooses the escrow company. A buyer’s offer should contain a clause that they have “the right to shop around” for better pricing and have the seller’s escrow match that pricing.
To shop rates and more information on how title insurance is part of your transaction log on to Title4u.com
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What Does an Escrow Service Charge?
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The LISTING AGENT chooses the escrow company (although its negotiable). But buyers shouldn’t hesitate to shop one company against another to get a lower “unpublished rate.”
Escrow offers are easily shopped (just by using the yellow pages) and will put their “service costs” in writing. Get a list of all fees including (but not limited to):
Notary Fees
Sub Escrow
Any other fees that are made payable to the escrow company.
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Who Pays for What?
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(...following the offer-counter offer process is completed escrow is “opened”)
The escrow process is (for most buyers) a confusing process and stressful process. It is particularly so during the first few days.
“Opening an Escrow” starts with a buyer writing a check (which is faxed to escrow) and escrow typing up “escrow” instructions which are delivered back to the buyer and seller.
The escrow instructions mirror (EXACTLY) what the buyer and seller agreed to the purchase contract.
And despite the axiom that ‘everything is negotiable' the following example of fees is what is considered customary.
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The SELLER can generally be expected to pay for:
Title insurance premium & one half of the total escrow fee
Real estate commission(s)
Document transfer tax ( a county recorder’s fee at the rate of 1.10 per $1000 of sales price)
Any city transfer tax
Any loan fees required by buyer’s lender
Payoff all loans in seller’s name plus prepayment penalties
Interest accrued to lender being paid off, statement fees, reconveyance fees and prepayment penalties
Termite inspection (according to contract)
Termite work (according to contract)
Home warranty
Any court judgments, tax liens, HOA dues against the seller
Tax proration (for any taxes unpaid at time of sale) plus any and all delinquent taxes
Recording charges to clear all documents of record against seller
Any bonds or assessments
Notary fees
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The BUYER can generally be expected to pay for:
Title insurance premium (A.L.T. A. Premium)
Escrow fee
Notary fees
Recording charges for all documents in buyer’s name
Termite inspection (according to contract)
Tax proration (from date of acquisition)
Homeowner’s transfer fee
All new loan charges
Interest on new loan til the end of the upcoming month (typically 15 days) from date of funding
Inspection fees (roofing, property inspection, geological, etc.)
Fire insurance premium for first year
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Yours or Theirs
The Personal vs. Real Property Dilemma
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The distinction between personal property and real property is the "flash point" in many transactions The purchase contract is written to include all real property; that is, all aspects of the property that are fastened down or an integral part of the structure. For example: include light fixtures, curtain rods, recessed mirrors, trees and plants in the ground. It would not include potted plants, freestanding refrigerators, washers and dryers, microwaves, bookcases, chandeliers. If there is any confusion whether an item is included in the sale or not, it is best to specifically mention the item.
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Cal-FIRPTA
(California Foreign Investment in Real Estate Tax Act)
Assembly Bill 2065
Signed by Governor Gray Davis September 11, 2002
Effective January 1, 2003
WHAT IS CAL-FIRPTA?
Individuals who sell real property, other than their primary residence, sometimes owe California State Taxes on a portion of the sale. Law makers have made it the responsibility of the buyer, to collect an estimated tax and send it to the Franchise Tax Board. Buyers must comply by timely filing certain paperwork, withholding 3-1/3% of the sales price and forwarding the money to the FTB. Failure on the part of the buyer will result in a minimum penalty of $500.
HOW DOES THE BUYER COMPLY?
The escrow company is required to notify the buyers in writing of their withholding obligation. The buyer normally directs the escrow company to assume the responsibility to withhold and pay the money by the due date, file Form 597 and provide a copy of Form 597 to the seller.
ARE THERE EXEMPTIONS?
Exemptions for individuals re transactions that:
Involve the seller’s principal residence (IRC Section 121)
Are below $100,000
Involve like kind exchanges, with exception of boot (IRC1031)
Result in a loss for California tax purposes
Involve involuntary conversions (IRC Section 1033)
Exemptions also include sellers who are:
Corporations with a permanent place of business in California
Partnerships of LLCs
Tax exempt entities, insurance companies, IRAs. Qualified pension plans and Irrevocable Trusts with a California Trustee
Sellers qualifying for exemption must sign a written certification. The form for individual is 593-c. For non-individuals the form is 593-W.
For more information and necessary forms, access the FTB’s Website at
http://web.archive.org/web/20071216104024/http://www.ftb.ca.gov/ or call the FTB at (888) 792-4900. Linda Abba and Brenda Sizer (916-845-7371) have presented workshops regarding Cal-FIRPTA for Real Estate Professionals. They may offer expert assistance.
